WELLINGTON (Reuters) - New Zealand’s central bank and financial markets regulator said on Monday they had found “significant weaknesses” in banks’ risk management and called on the government to tighten up regulation.

FILE PHOTO: Pedestrians walk past as a security guard stands in the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. Picture taken July 3, 2017. REUTERS/David Gray

After a five-month inquiry into banks’ conduct sparked by neighboring Australia’s financial services Royal Commission, the Reserve Bank of New Zealand (RBNZ) and Financial Markets Authority (FMA) concluded that New Zealand banks needed to markedly improve how they identify and manage unethical behavior.

New Zealand Prime Minister Jacinda Ardern said on Monday that her government would be watching the Australian Royal Commission’s final findings due out in February “very closely” and that she would ask the RBNZ and FMA to consider whether its report raised any issues that warranted further action.

New Zealand’s regulators said they had not identified widespread misconduct or poor culture to the extent found in Australia’s inquiry, which has rocked the Australian parent companies of major banks in New Zealand. [nL3N1T11KC]

“While they (the problems) may not be as widespread as what has been seen in Australia, banks would do well to pay heed around the guidance they’ve been given to be upping their game,” Ardern told reporters.

Ardern’s centre-left coalition government has taken a tough stance on New Zealand businesses since taking the helm last year, lifting the minimum wage and tightening rules on foreign investment as it seeks to curb rising inequality.

That sent business confidence to decade lows - though sentiment has slightly improved in recent months. [nS9N1X6007]

In neighboring Australia the ‘Big Four’ largest lenders have been named and shamed in an inquiry looking into financial wrongdoing, including Australia and New Zealand Banking Group (ANZ.AX) which operates New Zealand’s largest bank through a subsidiary.

Commonwealth Bank of Australia (CBA.AX), Westpac Banking Corp (WBC.AX) and National Australia Bank (NAB.AX) also have subsidiaries in New Zealand.

RBNZ Governor Adrian Orr told reporters on Monday that he expected New Zealand banks would “seriously review themselves against the findings coming out of the Royal Commission”.

The RBNZ and FMA called on New Zealand’s government to tighten up regulatory oversight, suggesting it consider imposing a legal duty on banks to protect customers’ interests and to require banks to have adequate systems to manage conduct risks.

The regulators will provide tailored feedback to each of the 11 banks in the review, which will be required by the end of March 2019 to report on their plans to address any issues.